The Liquidity Impact on Bond Calculation on Credit Losses: A Malaysian Banks’ Perspective

Dr B. Valentine Arulanandam, Dr C. Selvan and K. Li Shin

International Journal of Finance, Insurance and Risk Management, 2020, vol. 10, issue 2, 79-115

Abstract: Purpose: Currently in Malaysia, the latest update in Financial Instrument-Credit Losses is of main concern. Previously, accountants have to record credit losses which have already been incurred. This research highlights the ways to calculate credit losses for bond and also how it will affect liquidity of banks. The main objective of this research is to study the liquidity impact of the latest update in bond calculation on credit losses among Malaysian banks. Approach/Methodology/Design: There are several approaches to calculate credit losses. The research will focus on 3 approaches which are; loss-rate approach (Collective Evaluation), loss-rate approach (Individual Evaluation) and vintage-year basis. Findings: Now, with this new update, accountants have to record credit losses based on historical information, current situation, and forecasts, in line with the introduction of CECL model. The paper draws on the impact of CECL model on the credit losses incurred by Malaysian banks using three distinctive methods on bonds and the related liquidity position on its balance sheet. This research uses the eight Malaysian local banks. Practical Implications: This research is very useful for accountants to have a greater understanding about CECL model. Originality/value: There are several studies by Goldwyn (2017), Journal of Accountancy (2016) and, Cohn and Statigna (2016) which resonates with this research, but hardly any seems to be pertaining to the Malaysian context.

Keywords: Credit losses; CECL model; financial instrument. (search for similar items in EconPapers)
JEL-codes: G12 G24 G29 M41 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:ers:ijfirm:v:10:y:2020:i:2:p:79-115

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